Reducing ad loads makes TV more competitive with ad-free SVOD viewing. However, without addressability, it looks like ad values don’t rise enough to compensate for lost ad sales.

John Martin, Turner CEO, is a haunted man. Speaking at CES 2018 he expressed the fears of ad-supported linear TV channel owners all over America:

John Martin CEO Turner

“My fear…is that by the time the industry gets to full addressability everybody is going to be watching on Hulu and Netflix.”

His fear is certainly justified. I estimated earlier this year that ad-free Netflix viewing in the U.S. took between $3 and $6 billion out of the TV advertising market in 2017. Simply put, before Netflix the 125 million hours of video consumed by the company’s US subscribers each day would have been spent watching traditional ad-supported television.

Reducing ad loads to fight ad-free SVOD viewing

One of the cures that the television industry has proposed is reduced ad loads. To be sure, ad loads have grown far too burdensome, increasing the attractiveness of ad-free SVOD. Randy Freer, CEO of Hulu, capture the problem when he said:

Randy Freer, Hulu

“We overloaded the formats, we overloaded the commercial messages going to consumers. So, they started to say ‘this is too much…my time is more valuable than that.’ As an industry, I don’t think we value people’s time in a way that allowed them to say ‘I get this, there’s a transaction. I’m not paying as much as I could be paying because my entertainment experiences is being supported by advertising.”[1]

One key strategy programmers are trying is to reduce the ad load during the commercial breaks. For example, Turner reduced ad-loads in hit shows such as Animal Kingdom and Good Behavior. The company gave 10 minutes back to the storytellers and saw higher commercial viewing, less tune-out, and higher ratings.

On the face of it, this sounds like a good strategy. Higher ratings and scarcer advertising slots should result in higher values for the remaining ads. Higher ad values should compensate for fewer ads.

Reduced ad loads boost engagement, but not enough to maintain revenue

Data from Freewheel certainly confirms that reducing the ad loads boosts engagement. The company worked with publishers to experiment with reduced ad loads in digital streams. Freewheel’s testing confirmed that reduced ad loads do improve engagement. A 30% reduction in ads led to a 5% increase in videos watched per visit and a 1% increase in visits per viewer. A 50% reduction led to a 7% increase in videos watched per visit, and the same 1% increase in visits per viewer.

The improvement in engagement seems very small for such a huge cut in ad load. Moreover, it looks like ad values didn’t rise enough to compensate for the lost ads. In Q2 2017, Viacom attributed a 2% slide in ad revenue to reduced ad loads.

Addressability could be the answer

Mr. Martin pointed to ad addressability as a possible answer. If viewers see more targeted ads, advertisers will pay more for them, and they will be watched more readily by viewers. Ironically, one of Mr. Martin’s fears, Hulu, provides hope that he could be right. According to Mr. Freer, most of Hulu’s subscribers watch on-demand TV with ads. What’s more, Hulu ad breaks typically deliver 1-to-3 targeted ads per break, lower than television’s ad load.

Hulu ad values are relatively high, with the company enjoying $35-$40 CPMs in upfront buying. Ad values often go for three times that when inventory is low. As well, Hulu engagement is the best in the premium online video streaming industry. comScore reports Hulu streamers watch for, on average, 28.9 hours a month, versus Netflix ad-free viewers watching 26.9 hours per month.

Why it matters

Television providers are looking to reduced ad-load to make the experience more competitive with ad-free SVOD viewing.

The strategy seems to work, but ad values do not rise enough to compensate for the loss of the ad sales.

Making TV ads more relevant to the viewer with targeting seems to both increase ad values and make the experience more engaging.

[1] In an interview with IAB capture on YouTube here: https://www.youtube.com/watch?v=FwCZoaldw7w

One Comment

Netflix has proven it is the preferred way.
Pay a “little” with NO ADS, and watch TV.
or watch FREE TV and have a “few, short Ads”
This is the way TV was intended.
Remember FREE Antenna TV !!!!!!!!
They CAN’T have it BOTH ways. Viewers WON’T buy it.